Compounding is a simple mathematical formula wherein investment earnings, such as dividends
or interest, are reinvested. The reinvested portions along with original investment keep generating more dividend or interest.
The end value of an investment is affected by a number of factors. Time is the most important factor—the sooner the
investment is started the better. The beginning balance, the frequency of deposits, the number of years, and the interest
rate, along with when the deposit is made (e.g., on the first of the month or at the end of the year), are other factors that
affect the end value of an investment.
If enough time is given and the yearly earnings are always reinvested, the original investment
will grow exponentially. The process is slow initially, but will accelerate as time goes by. Generally, the amount invested
is small in the beginning. As the amount gets larger, the return on investment will also gets larger and larger year after
When a small amount of money doubles, the amount is still small; but, when a large amount
of money doubles, the amount can be astronomical.
For example, a $10.00 annual investment at 10%, compounded monthly, will double to $20.00
in 7.2 years (Rule of 72) and to $40.00 in 14.4 years.
In contrast, a $1 million dollar investment will become $2 million dollars and $4 million
dollars, respectively, during the same periods.
Still, even very small investments made over long periods of time can grow to enormous
For instance, a weekly investment of $50.00 at 5% and 10% interest, compounded monthly,
will grow to $586,839.55 and $3,888,752.16, respectively, in 50 years.
A difference in the rate of return as little as 1% will make a huge difference in the
total of the investment over time.
Below is an excerpt from an article by Chuck Saletta entitled “Your First Million
Is the Toughest” (Friday, August 24, 2007, provided by The Motley Fool.Fool.com):
The old saying that the rich get richer is true. As long as you manage your money
well, it's far easier to make money if you've already got some cash socked away than it is to start from scratch. The reason
is simple: compounding.
When you've already got money working on your behalf, each percentage point of return
simply adds that many more dollars to your account balances. After all, if a stock you own goes up in value, it's far better
to own 10,000 shares than it is to own 100.
The whole article is worth reading to gain more insight into how “to go from
$0 to $1 million.” http://finance.yahoo.com/banking-budgeting/article/103410/your-first-million-is-the-toughest?mod=oneclick
No one knows how long he or she will live; therefore, a person is never too old to start
investing. Conversely, a person is never too young to start investing. The earlier the money is invested the more time the
money has to compound. The person who waits to invest will ultimately have to invest more money and may still fall short or
fail to catch up with the person who invests early.
THE ULTIMATE OBJECTIVE OF INVESTING IS TO ACCUMULATE ENOUGH WEALTH SO AS TO RETIRE AT
WILL, AND IF RETIRED, TO LIVE AS COMFORTABLY AS DESIRED.
Since time is money, there is only one logical conclusion when deciding whether to invest
now or to wait, and that is, the time to invest is almost always is NOW!